Merkel Concedes to the PIGS and Accepts Bailout Agreement


Angela Merkel has appeased other European leaders, and the markets, by agreeing to a plan that aims to tackle the eurozone crisis. The plan, backed by Italy, Spain, and France, allows for rescue funds to remain available for banks without constituent nations having to impose austerity measures. In Germany the press has spun the agreement as a defeat, with Merkel being portrayed as having conceding too much to Spain and Italy in particular.

The current bailout mechanism, the European Financial Stability Facility, will continue to provide relief until the introduction of the recently proposed European Stability Mechanism that will be launched next month. Under the new proposals not only will funds be available to banks regardless of the behavior of the countries they happen to be in, but the funds may now be used to by bonds.

The Germans, Dutch, and Finns had been pushing against these sorts of proposals. However, Merkel's concession looks like the beginning of the end of the anti-bailout rhetoric. The only hint at good news is that under the new agreement banks, no countries will receive funds. The worst news is that plans are in place for there to eventually be a closer and more unified union, something welcomes by most European politicians.  

The markets reacted positively to the news and borrowing costs for Italy and Spain have dropped. However, optimism may be short lived if Spanish and Cypriot bailouts do not have their desired effect and the plans cannot get implemented within the next few months.

It is not hard to understand why Merkel is now embarking on a damage control tour. The agreement unsurprisingly fails to take into account any moral responsibility. The bond agreement means that Germans will now bear similar burdens as the Greeks, Spaniards, and Italians. With debt no longer considered a national responsibility fiscal union looks increasingly likely.

If you have a moment (and a stiff drink to hand) you can read the agreement here